Fed lowers rates, nods to limits of data during shutdown; two policymakers dissent

WASHINGTON: A divided U.S. Federal Reserve cut interest rates by a quarter of a percentage point on Wednesday and announced it will restart limited purchases of Treasury securities after money markets showed signs that liquidity was becoming scarce, a condition the U.S. central bank has pledged to avoid.

The rate cut, which included a nod to the data limits the Fed faces during the current federal government shutdown, drew dissents from two policymakers, with Governor Stephen Miran again calling for a deeper reduction in borrowing costs and Kansas City Fed President Jeffrey Schmid favoring no cut at all given ongoing inflation.

The balance sheet decision will keep the total amount of the central bank’s holdings steady on a month-to-month basis as of December 1, but shift its portfolio by reinvesting the proceeds of maturing mortgage-backed securities into Treasury bills.

The 10-2 decision to lower the policy rate to a range of 3.75%-4.00% was expected by investors as a way for the Fed to temper any further decline in a job market policymakers worry may be losing steam.

Fed will likely cut again despite economic murkiness from shutdown

U.S. stock indexes held small gains after the release of the policy statement, while Treasury yields, which move inversely to prices, rose. Traders and investors continued to strongly favor another rate cut at the Fed’s final policy meeting of the year in December followed by another easing in March.

“A single soft inflation release, anchored expectations, and anecdotal cooling labor demand support a cautious easing bias,” said Alexandra Wilson-Elizondo, global co-CIO of multi-asset solutions at Goldman Sachs Asset Management, adding that “if conditions hold, another 25-basis-point cut at the December meeting seems likely.”

Fed policymakers acknowledged the limits in their decision-making process posed by the government shutdown, dating their view of the unemployment rate to August - the month of the last official jobs release - while noting that “available indicators suggest” the economy continued growing at a moderate pace.

Trump says new Fed chair decision might be made by year-end

Inflation has not risen as strongly as initially expected on the back of the Trump administration’s new import taxes, but nevertheless has climbed from around 2.3% in April to about 2.7% in August, according to the last official estimate released for the Personal Consumption Expenditures Price Index before the shutdown.

The Fed uses the PCE to set its 2% inflation target, and in projections issued in September policymakers expected it to rise to 3% by the end of this year.

They expect that increase in prices to ease over time, while concern about the strength of the job market has climbed.

“Downside risks to employment rose in recent months,” the Fed said in its new policy statement.

The dissents by Miran and Schmid marked just the third time since 1990 that policymakers have dissented both in favor of easier and tighter monetary policy at the same meeting.